chapter 3 flashcards
what does Canada use for the preparation of financial statements for domestic listed companies?
International Financial Reporting Standards
what does the Statement of Financial Position show?
the book value of the firm’s assets, liabilities, and equity as of a specific date
list the order of the statements?
- statement of income
- statement of equity
- statement of financial position
- statement of cash flow
how do we calculate Profit?
formula
revenue-expenses
when a company has subsidiaries, it report to…?
a consolidated balance sheet
what does a Consolidated Balance Sheet mean?
means that the balance sheet shows the position of the parent company and its subsidiaries
what does IFRS provide ?
provides the principles to use to recognize and measure the firm’s assets, liabilities, and equity, resulting in their book value or carrying value
what is included in a Statement of Financial Position ?
- current assets
- non-current assets
- current liabilities
- non-current liabilities
- shareholder’s equity
what is a Current Asset?
these are the most liquid assets-only Riley to be used up or turned into cash within a year
what do Current Assets include?
- cash and cash equivalents: treasury bills, banker’s acceptance, and commercial proper maturing within a year
- receivables: values of sales for which Empire had not received payment from its customers
- inventories
- prepaid expenses: expenses paid in advance
- loans and other receivables
- income taxes receivable: tax returns from CRA that are not received yet
- assets held for sale: include land and buildings which are intended to be disposed of in the next 12 months
which asset is the most difficult to deal with and why?
inventory is the most difficult to deal with as its very expensive so you have to be careful
why shouldn’t people think “free is free”?
because its usually hidden somewhere
what are the types of Non-Current Assets?
- loans and other receivables: loans receivable represent long term financing to certain retail associates of Empire
- investments in equity: investment in associates and joint ventures. other assets include deferred lease assets and derivative assets
- property and equipment: fixed and tangible assets used in the revenue producing activities of the company
- investment properties
- intangible assets: brand name, software programs
- goodwill: not an identifiable aset, it is generated when a company buys another company
- deferred tax assets- deferred income tax
what’s a liability?
liabilities represent money owed by the firm to its creditors
what’s a Current Liability?
liabilities to be paid off within a year
what do Current Liabilities include?
- accounts payable and accrued liabilities: Empire’s unpaid bills/invoices for supplies, other services and outstanding wages and salaries
- income tax payable
- provisions: for restructuring, environmental costs, lease contracts, and legal costs applicable within one-year period
- long term debt maturing within a year
what are the two types of debts?
current debts and long term debt
what are Non-Current Liabilities?
obligations that come due in more than oe year.
whats included in Non-Current Liabilities?
- long term debt
- other long-term liabilities
- employee future benefits
- deferred tax liabilities
what is Shareholder’s Equity?
what is left after all of firm’s obligations(liabilities) have been paid off belongs to the shareholders.
how do we calculate Shareholder’s Equity?
formula
total assets - total liabilities
what does Shareholder’s Equity include?
- capital stock plus contributed surplus: the value of shares sold to investors
- retained earnings: earnings (or profits) not paid out as dividends and hence reinvested into the company on shareholder’s behalf
- non-controlling interest: value of equity of subsidiaries not owned by Empire
under IFRS, how is Plant and Equipment reported?
using the cost method or the revolution method
what is the Cost Method?
when an asset is being carried at its ordinal cost less accumulated depreciation booked to date, less any impairment losses accumulated to date
what is Depreciation?
an expense that allocates the cost of the asset over its useful life
what is Depreciation based on with the Cost Method?
based on the asset’s original cost
what is the Revalution Method?
fair market value
what is Depreciation based on under the Revalution Method?
based on the asset’s revalued amounts
how are Investment reported?
at a fair value or cost, depending on the nature and management’s intent for the investments
how do book value look when cost is used?
“backward-looking” measures of value, based on the past cost of the asset, not its current market price or value of the firm
what does Market Value measure?
current values of assets and liabilities
what’s the difference between the Market Values of Assets and Liabilities ?
the market value of the shareholders’ equity claim. The stock price is simply the market value of shareholders’ equity divided by the number of outstanding shares
why is the difference between Book Value and Market Value of Shareholder’s Equity the greatest?
- the book value of equity measures the cash that the company received on the original issue of shares in the past plus the profits that the company has retained and reinvested in the business on their behalf
- excludes many assets that add value to company
- market value of shareholders’ equity is the difference between the market value of assets and liabitlies
Assets=?
formula
liabilties+equity
what is the Statement of Comprehensive Income or Income Statement?
financial statement that shows profits and other comprehensive of a firm over a period of time
Comprehensive income is the sum of two parts
profits (net income) and other comprehensive income
what is Profit Section?
the largest part of the statment, showing the company’s revenues, operating expenses, finance income and expense, and taxes, arising from operating profit, and ending with profit (or net earnings or net income)
what type of transactions, under IFRS are excluded from the Statement of Comprehensive Income? and where are they reported?
transactions with owners of the firm equity (shareholders) are excluded
they are reported in the Statement of Changes in Equity, which explains the change from the previous period of each component of equity on the Statement of Financial Position
what are 4 things we need to know about Profits
- Profits subtract depreciation and amortization charges and impairment losses (non-cash expenses)
- profits ignore cash expenditures on new capital equipment and intangibles (the expenses are capitalized)
- profits record income and expenses at the time of sales, not when the cash exchanges actually occur
- profits do not consider changes in working capital
what is the Statement of Cash Flows?
the statement of cash flows shows the firm’s cash inflows and outflows from Operating Activities, Investing Activities, Financing Activities, over a period of time
what is Cash Flows from Operating Activities ?
the cash generated from Empire’s normal business activates
it starts with a net income or net earnings but adjusts that figure for those parts of the income statement that do not involve cash coming in or going out. this involves adding back non-cash expenses and subtracting non-cash income
what’s the purpose of Cash Flows from Investing Activities?
this section shows the cash inflows and outflows related to investing activities
eg. purchase and disposal of property, equipment and investment property
what does Cash Flow from Financing Activities show?
this section shows the cash inflows and outflows related to financing activities
eg. issuance and repayment of long-term debt, interest payment on debt, dividends paid to shareholders
what can the information in the Statement of Cash Flows be used for?
to measure a company’s cash flows from assets
Cash Flow from Assets is the Cash Flow generated…?
by operations, after investment in working capital and operating assets
how do we calculate CF from assets?
formula
cash inflow(outflow) from operating activities + cash inflow(outflows) from investing activities
what can the Information in the Statement of Cash Flows be used for?
used to measure a company’s financing flow-the change in the company’s cash + the cash paid to investors
how do you calculate Financing Flow?
formula
change in cash and cash equivalents - cash from financing activities
why is Cash Flow from Assets and Financial Flow also called Free Cash Flow?
it’s free because it’s the cash remaining after the firm has made its investment in new operating assets. it’s free to be put into the bank as spare cash and/or paid out to company’s investors
what kind of approach does IFRS take to accounting?
takes a principle based approach to accounting which leaves room for discretion and professional judgement
what are some examples of grey areas that demand judgment calls, and may tempt those wishing to conceal unflattering information to misuse any leeway in accounting rule
- revenue recognition
- cookie jar reserves
- off balance sheet assets and liabilities
which years were filled with accounting scandals in the US and Canada
the years 2000 to 2004
when did the US congress pass the Sarbanes-Oxley Act and why?
in 2002, to ensure that a firm’s reports represent their actual financial conditions accurately
how do we calculate Corporate taxes?
formula
federal tax+provincial tax
TRUE OR FALSE: do provincial taxes vary across country?
TRUE
what is the appropriate provincial corporate tax rate ?
it is added to the federal rate to give the overall tax rate
which expenses are deducted when firms calculate taxable income ?
labour and materials costs, marketing and selling costs, and admini9stration expenditures
which type of assets cannot be deducted all at once ?
costs of new equipment, new factories, and other non-current assets
instead they are deducted over time, deprecating the cost of the assets
the allowable depreciation for tax purposes
Capital Cost Allowance
interest paid by a corporation ?
a tax deductible expense
interest payments increase …?
the amount of money available to creditors and shareholders
Marginal Tax Rate
tax paid on each extra dollar of income
Average Tax Rate
formula
total tax bill divided by total income
which taxes are calculated separately ?
individual taxpayers, federal and provincial
taxes for individuals are progressive …
the higher the income, the higher the tax rate
how do Capital gains occur?
when you sell an asset for more than its original purchase price
